Prime Trust Action Group Unitholder Update No. 8 – 30 August 2011

Further to our recent Update No. 7, we would like to update unitholders as follows:

Public Examinations

Public Examinations were conducted in the Supreme Court of Victoria on 22-24 August 2011. The following parties appeared before the Court:

Parties Associated with APCH, the Trust’s Responsible Entity

Mr William Lewski, former Managing Director
Mr Philip Powell, former Managing Director (and prior to that, corporate adviser to APCH through his role at Kidder Williams)
Mr Neil Rodaway, Managing Director
Mr Mahanthran Krishnan, former Company Secretary

Parties Associated with Madgwicks, the Trust’s Legal Advisers

Ms Lorna Gelbert, Partner

The four persons from Lend Lease Primelife (“LLP”) who had been summoned to appear were not put on the stand due to legal professional privilege being claimed over a number of documents that solicitors for KordaMentha wished to examine prior to questioning the LLP parties. One other person who had received a summons, Mr Graeme Levy, from Madgwicks, was excused. We would expect representatives from LLP, directors of APCH and a number of other parties to be called for the second round of Public Examinations which are currently scheduled to be conducted in early November 2011.

The Public Examinations were conducted by Mr Robert Newlinds, SC, representing KordaMentha, the Receivers to seven of the Trust’s retirement villages. The Examinations mainly focused on how the village management rights came to be acquired by interests associated with Mr Lewski and then sold to Babcock & Brown Communities Ltd (now LLP) in a transaction which earned Mr Lewski the sum of $60 million, and led to the value of the Trust’s retirement villages falling by more than $100 million as a result of the management rights being held by a hostile third party.

As unitholders will recall, the Responsible Entity of the Prime Trust was Australian Property Custodian Holdings Ltd (“APCH”). APCH was the trustee of the Trust and therefore had onerous responsibilities in terms of representing unitholders. As a Responsible Entity, APCH was, amongst other things, legally required to act in the best interests of unitholders, and if there was any conflict between its own interests and those of the unitholders, APCH was obligated to give priority to unitholders’ interests.

It is not appropriate for us to list all of the specific information revealed by the Examinations since some of the topics may be the subject of further questioning and it is inappropriate for us to highlight what may or may not be relevant but we can provide the following examples to provide some flavour to the proceedings:

• We believe that the Examinations repeatedly unearthed examples where APCH and its associates acted in their own interests to the very great detriment of unitholders. During the Examinations, we repeatedly heard witnesses state that they only considered the position of APCH in its own right and did not consider APCH’s role as trustee and did not consider the impact of proposed decisions or transactions on the unitholders.

• The Court was informed that when the retirement villages were purchased by the Trust, the whole of the villages was purchased on a going concern basis, including the business of operating the village.

• It was confirmed to the Court that the management rights over the Trust’s retirement villages were transferred from APCH (a company controlled by Mr Lewski) to Retirement Guide Pty Ltd (“RG”, another company controlled by Mr Lewski).

• It was also confirmed that there was no consideration paid by RG to the Trust in exchange for being granted the extremely valuable management rights over the retirement villages.

• The Court was informed that several of the management agreements between APCH and RG were only oral in nature.

• It was confirmed that RG sold the management rights to Babcock & Brown Communities Ltd (“BBC”) for an agreed price of $75 million, with $60 million being paid up front and a further amount of $15 million being payable depending on performance (with such amount not eventuating due to a failure to meet the associated criteria). In addition, for any new village acquired by the Trust and given to BBC to manage, the Court was informed that BBC was required to pay RG a further fee being 10 times the first year management fee.

• Based on the responses from the various witnesses, we believe that that APCH, its directors and certain other parties may have overlooked some very basic principles such as considering whether parties had a conflict of interest, determining how such conflicts would be properly and transparently managed, whether it was legal for any of the parties to benefit in the face of such conflicts of interest and whether due consideration had been given to the effect of the transactions on the unitholders’ interests.

• In providing responses to the Court, a number of witnesses appeared to confirm that they had not considered the position of unitholders and that they simply assumed that the interests of all parties involved in various transactions were aligned.

• A number of other transactions came to light during the Examinations which, we believe, suggest that various arrangements or transactions could have been contrived to provide a benefit to certain parties.

• In providing responses to the Court, a number of witnesses appeared to confirm that their own position was heavily conflicted and that they did not take appropriate steps to deal with such conflict, nor seek independent advice as to how best manage such conflicts.

• Cases were highlighted where the APCH Board appeared to retrospectively amend the terms of various transactions and retrospectively amend Board Minutes.

• Some witnesses were repeatedly unable to answer questions due to an apparent inability to recall.

• In providing responses, a number of witnesses appeared to justify their actions from the perspective of trying to complete transactions within tight deadlines, and appeared to confirm that they did not give adequate consideration of the effect such transactions would have on the interests of the unitholders.

• Many issues came to light during the Examinations which, we believe, add further weight to potential actions against certain parties responsible for the collapse of the Prime Trust.

Unitholders may be interested to know that representatives from ASIC were in attendance at the Examinations.

To give unitholders a further feel for the Public Examinations, we attach a copy of an article that appeared in the Australian Financial Review on 25 August 2011.

Financial Ombudsman Service

As previously reported, the Administrator of the Trust commenced action in the Supreme Court of Victoria designed to prevent unitholders from pursuing claims through the Financial Ombudsman Service (“FOS”). The Action Group has always maintained that such action is unwarranted. Both the Administrator and FOS made submissions to the Court in relation to this matter in July 2011.

We have now been advised that the Administrator has indicated that he will withdraw this Court action and proceed with having the issues resolved by FOS under the established process. We are currently working through the various issues associated with the withdrawal of the Court action and will inform unitholders in due course as to any opportunities that may arise for their claims to be recognised.

Prime Trust Action Group
30 August 2011

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